Retirement Planning
If you are between the ages of 55 and 64, you still have time to increase your retirement savings. Whether you plan to retire early, late, or not at all, having enough money saved can make all the difference both financially and psychologically. Your focus should be on building or catching up when needed.
Of course, it’s never too early to start saving, but the last ten years before retirement can be critical. By then, you probably have a pretty good idea of when (or if) you want to retire, and more importantly, you’ll still have time to make adjustments if necessary.
If you feel like you need to set aside more money, consider these Five proven retirement planning tips.
Table of Contents:
Five proven retirement planning tips.
1- Fund Your 401(k) As far as possible:
If your workplace offers a 401(k) or similar plan such as a 403(b) or 457(b) and you haven’t maxed out yet, now is a good time to increase your contribution. Such a plan is not only an easy and automatic way to invest, but also allows you to defer paying taxes on that income until you withdraw it in retirement.
Since your 50s and early 60s may be your best earning years, you may be in a higher marginal tax bracket now than when you retire, meaning you will face a smaller tax bill then.
This, of course, applies to traditional 401(k) and other tax-deferred plans. If your company offers a Roth 401(k) and you choose this option, you pay income tax now but can make payments tax-free later.
The maximum amount you can put in your plan is adjusted for inflation each year. By 2023, that will be $22,500 for anyone under 50. But if you are 50 or older, you can add an additional $7,500 for a total of $30,000.
2- Rethink Your 401(k) Allotments:
Conventional financial wisdom says that as you get older, you should invest more conservatively, putting more of your money in bonds and less in stocks. The reason is that if your stock crashes in an extended bear market, you won’t have years to recover and may be forced to sell at a loss.
How conservative you should go depends on your personal preference and risk tolerance, but some financial advisors will recommend selling all of your stock investments and investing entirely in bonds, regardless of your age. Stocks still offer growth potential that bonds don’t.
The bottom line is, you need to stay diversified in both stocks and bonds, but in an age-appropriate way. For example, a conservative portfolio might consist of 70% to 75% bonds, 15% to 20% stocks, and 5% to 15% cash or cash equivalents such as a money market fund. Moderate conservatives can reduce the bond allocation to 55% to 60% and increase the equity allocation to 35% to 40%.
If you’re still investing your 401(k) money in the same mutual funds or other investments you chose in your 20s, 30s, or 40s, now is the time to take a closer look and decide if you like the distribution when you approaching retirement age.
A convenient option many plans now offer are target date funds, which automatically adjust their asset allocation as you approach your retirement plan year. Deadline assets might have higher fees, so select carefully.
3- Consider Adding an IRA:
If you don’t have a 401(k) plan available at work or if you’re already taking full advantage of one another option for retirement planning is an Individual Retirement Account (IRA). The maximum amount you can add to an IRA in 2023 is $6,500, in addition to an extra $1,000 assuming you are 50 years of age or older.
IRAs come in two flavors: traditional and Roth. With a traditional IRA, the money you contribute is pre-tax, meaning it is tax deductible for that year. With a Roth IRA, you get tax relief in the form of tax-free withdrawals.
There are two types that also have different rules regarding contribution limits.
Roth IRAs
As already mentioned, Roth contributions are not tax deductible, regardless of your income or the company’s retirement plan. This money will be taxed this year.
However, your income determines whether you qualify to participate in a Roth. Eligible contributions gradually decrease over the earnings range, reaching zero at the upper end of the range. The amount is adjusted annually.
For the 2023 tax year, the range of reduced income for taxpayers contributing to a Roth IRA is $138,000 to $153,000 for singles and heads of households. For married couples registering together, the range is $218,000 to $228,000, and for people married separately, the range is $0 to $10,000.
Note also that married couples filing taxes together can often fund two IRAs, even if only one partner has paid work, using what is known as a spouse’s IRA. IRS Publication 590-A contains regulations.
Traditional IRAs
If neither you nor your spouse has a workplace retirement plan, you can deduct your entire contribution from a traditional IRA. If either of you is insured under a retirement plan, your contributions may be at least partially deducted depending on your income and registration status.
4- Leave Your Retirement Savings Alone:
After age 59, you can start making fee-free withdrawals from your traditional retirement plan and IRA. With a Roth IRA, you can withdraw your contributions, but not your earnings, at any age without penalty.
There is also an IRS exception known as Rule 55 which waives the penalty of prepayment on pension plan distributions to workers aged 55 (50 and over for some government employees) who lose or quit their job. It’s complicated, so it’s best to talk to a financial or tax advisor if you’re considering using one.
But just because you can withdraw money doesn’t mean you should – unless you really need the money. The longer you leave your retirement account untouched, the better off you’ll be; However, you should start withdrawing the required minimum distribution from age 73 if you were born between 1951 and 1959, or from age 75 if you were born in 1960 or later. This has increased from the previous 72 years.
5- Don’t Forget About Taxes:
As you build your retirement savings, remember that not all of the money is yours. If you make withdrawals from a traditional 401k plan or traditional IRA, the IRS will tax you at your normal income level not the lower capital gains rate.
So for example, assuming you are in the 22% category, every $1,000 you withdraw will only earn you $780. You may want to be strategic about saving more of your retirement savings—for example, by moving to a tax-friendly state.